WALLAGGA

College of Business and Economics

Department of Accounting & Finance
Advanced Financial Accounting
II(ACFN-402)
Credit hour: 4
Instructor: Ifa A.(MSc)
Phone: 09/22220060
email: [email protected]
CHAPTER ONE-JOINT ARRANGEMENTS
IFRS 11 & IAS 28
Chapter content and Objectives

Meaning and types of joint arrangements

Accounting for investments in joint ventures
Accounting for joint operations
Accounting for joint ventures
Disclosure requirements
NATURE OF JOINT ARRANGEMENTS

In today’s business community, joint arrangements are

less common but still are employed for many projects
such as: (1) the acquisition, development, and sale of
real property; (2) exploration for oil and gas; and (3)
construction of bridges, buildings, and dams.

In general, parties come together to form joint

ventures/Operations when all involved believe that they
will have greater success working cooperatively on a
specific project, product or business than they would
have if they each undertook the endeavor on their own.
CONT…

Historically, joint ventures were used to finance the sale or exchange

of a cargo of merchandise in a foreign country. In an era when
marine transportation and foreign trade involved many hazards,
individuals would band together to undertake a venture of this type. The
capital required usually was larger than one person could provide,
and the risks were too high to be borne alone.

 In its traditional form, the accounting for a joint venture/operation

did not follow the accrual basis of accounting. The assumption of
continuity was not appropriate; instead of the determination of net
income at regular intervals, the measurement and reporting of net
income or loss awaited the completion of the venture.
CONT….

A Modern joint venture/operation may be organized as a

Corporation or Partnership.

Modern joint ventures are usually corporate joint ventures having

Capital accounts/shares, Legal entity, economic entity and
Accounting entity.
 INVESTMENT

 An entity may conduct its business through strategic

investments in other entities.
 IFRS broadly distinguishes three types of such strategic
investment:
 the reporting entities controls the investee company
 the reporting entities jointly control the investee company
with one or more third parties; and
 the reporting entities has significant influence over investee
company

7
 JOINT ARRANGEMENTS(IFRS 11)

• The creation of joint arrangements ( corporation ,Plc or partnership

joint ventures) is very common in projects that typically:
• Require significant funding
• Involve significant project risk
• Require collaboration among investors to share expertise and
resources.

• Has the following benefits:

 Capital needed can be raised .
 Transfer of technology and knowhow.
 Provide raw materials for the Joint Arrangement .

8
ADVANTAGE OF JOINT ARRANGEMENTS

•There are many reasons why one might use a joint arrangement
to conduct business ,such as to:
I. Expand geographically
II. Enter new market or industry
III. Facilitate distribution of the product
IV. Protect supply chain and production capacity
V. Bring in additional expertise
VI. Sharing Business Risk
VII.Flexibility
VIII.Favorable Tax Treatment
 TYPES OF INTEREST IN OTHER ENTITIES
Subsidiary Associate Joint Investment
Interest Interest Arrangement Interest

Ownership >50% 20% - 50% Joint < 20%

Accounting IFRS 3 and IAS 28 IFRS 11 IFRS 9

Standards IFRS 10

Accounting Control = Significant Joint operation = At fair value.

Treatment Consolidation influence = in accordance with Separate
Equity method relevant financial
IASs/IFRSs; Joint statements are
venture = equity not required.
method.
Determining the accounting for interests in other
entities
(Interaction of IFRS 10, 11, 12 and IAS 28)

Outright control?

Yes No

Consolidation (IFRS 10) Joint control?

Yes No

Determine type of joint Significant influence?

arrangement (IFRS 11)
Yes No

Joint Operation Joint Venture

Financial asset
Account for assets, liabilities, Equity accounting accounting
revenues and expenses (IFRS 11) (IAS 28) (IAS 39/IFRS 9)

IFRS 12 IFRS 7
©2013 Grant Thornton International Ltd. All rights reserved. 4
11
Classification
Interests in other entities
No
Control alone?
Joint
Yes Control? No
Significant influence? No
Subsidiary
(Chapter 4&5) Yes Financial asset or
Yes
other interests
Joint Arrangement Associate (Chapter 1)
IFRS 10 (Chapter 1)
(Consolidation) IFRS 9 or
Define type of IFRS 12
joint
arrangement?
Joint Operation Joint Venture
IFRS 11
(Account for assets, IAS 28
liabilities, revenues and (Equity method)
expenses)
Disclosure in accordance with IFRS 12

12
JOINT ARRANGEMENTS (IFRS 11)
•IFRS 11 aims at establishing principles for financial reporting by
entities that have an interest in arrangements that are controlled
jointly, i.e. joint arrangements.

•To meet this objective, IFRS 11 covers the following topics:

1.To define joint arrangement and joint control

2.To require an entity that is a party to a joint arrangement to

determine the type of joint arrangement in which it is involved by
assessing its rights and obligations, and

3.To require an entity to account for those rights and obligations

in accordance with that type of joint arrangement.
 JOINT ARRANGEMENTS (IFRS 11)

•All entities are required to apply IFRS 11 Joint Arrangements

when it is a party to a joint arrangement.

•A joint arrangement is an arrangement of which two or more

parties have joint control and has the following characteristics:

a.The parties are bound by a contractual arrangement.

b.The contractual arrangement gives two or more of those parties
joint control of the arrangement.

•The definition of joint arrangement implies that there are two

critical elements for a joint arrangement, i.e.
–Contractual arrangement
–Joint control
 JOINT ARRANGEMENTS (IFRS 11)

Contractual arrangements define :

o The purpose, activity and duration of joint arrangement
o The decision making process
o Capital or other contributions required of the parties
o How the parties share assets, liabilities, revenues, expense or
profit/loss relating to joint arrangements
JOINT CONTROL

 Joint control is the contractually agreed

sharing of control of an arrangement,
which exists only when decisions about the
relevant activities require the unanimous
consent of the parties sharing control.
 JOINT ARRANGEMENTS: JOINT CONTROL

Does the contractual arrangement give all

the parties (or a group of the parties)
control of the arrangement collectively? No Not in
yes scope of
Do the decisions about the relevant activities
IFRS 11
require the unanimous consent of all the
parties that collectively control the No
arrangement?
yes
Joint operation

Joint Arrangement
Joint venture
 JOINT ARRANGEMENTS (IFRS 11)
• Unanimous consent: means that any party within the
arrangement can prevent other party from making
unilateral decisions without its consent.
• Contractual arrangement: are enforceable agreements
reached among the parties which are often in writing.
• This agreement may be:
– Signed between parties and explicitly stated or

– Derived from documented minutes of discussion, and

– From the articles of association, charters, bylaws and

similar mechanisms.
When the minimum required proportion of rights required to make decisions can
be achieved by different combinations of parties agreeing, joint control is normally not
established.
 IDENTIFYING RELEVANT ACTIVITIES

Major capital
expenditures
Who appoints
the Board and Appointing Acquiring/
key Board Disposing
management members subsidiaries
personnel?
Relevant
Activities Who can
change the
Selling/ buying strategic
goods and determining fundingdirection of
services the entity?
Dividend and
remuneration
decisions

Relevant activities are those activities that significantly affect the investee's return.
 TESTING EXISTENCE OF JOINT CONTROL
 The existence of joint control may explicitly stated in the contract
(usually of organized as partnership or Plc vehicle) Or It is implied
in the article of association and needs our judgment to determine
weather there exist a joint control.

Example 1: Three Factories ( Mathara, Wenji and Finchia) have

established another new sugar factory ( Shebelle Sugar factory) on
Wabe Shebelle river basin . Mathara has 55%, Wenji has 15% and
Finchia has 30% ownership rights in the new factory.

 The contractual arrangement reached between the parties specifies

that unanimous consent of all the parties is required to make
decisions about the entity’s relevant activities .
 Required: Assess the existence of joint control
20
 Example 2: Assume the previous data that Shebelle Sugar
factory is established between Wanji and Mathara only
and each has 50% of the voting rights (and equivalent
power) over the investee’s relevant activities.
 The article of association between the two owners

indicate that at least 51% of the voting rights are required

to make decisions about the entity’s relevant activities.
Required:
 Assess the existence of joint control
Example 3: Three Factories ( Mathara, Wenji and Finchia) have
established another new sugar factory ( Shebelle Sugar factory) on
Wabe Shebelle river basin.

Mathara 50% , Wenji 30% and Finchia 20% . Their article of

association indicate that at least 75% of the voting rights are required
to make decisions about the entity’s relevant activities.

Required: Assess existence of a joint control?

Example 4: Three Factories ( Mathara, Wenji and Finchia) have
established another new sugar factory ( Shebelle Sugar factory) on
Wabe Shebelle river basin.

Mathara 50% , Wenji 25% and Finchia 25% . Their article of

association indicate that at least 75% of the voting rights are required
to make decisions about the entity’s relevant activities.
Required: Assess existence of a joint control?
 TYPES OF JOINT ARRANGEMENTS

After an entity has assessed and determined that an arrangement

is a joint arrangement, then it is required to determine the type
of joint arrangement in which it is involved.

IFRS11 identifies two types of joint arrangements : Joint

operations or Joint ventures.

The key distinction between the two forms is the parties’ rights
and obligations under the joint arrangement .
Joint Operation: is a joint arrangement whereby the parties in
the joint control have rights to the assets, and obligations for
the liabilities of the arrangement.

Joint Venture: is a joint arrangement whereby the parties in the

joint control of the arrangement have rights to the net assets of
the arrangement.
TYPES OF JOINT ARRANGEMENT CONT..

26
ASSESSING SEPARATE ENTITY AS JV OR JO

 The assessment(right to net asset or to specific asset) is based on

the following facts:
 Structure of the arrangement
 legal form of the arrangement.
 The terms and conditions of the contractual arrangement.
 Other facts and circumstances.

27
Structure of a joint arrangement is through a

Not a separate vehicle A separate vehicle

An entity is required to consider

1.the legal form of the contractual arrangement
Joint Operation 2.the terms of the contractual arrangement and
3.when relevant, other facts and circumstances

Joint Venture
 Legal form of the separate vehicle: Does the legal form of the separate
Yes
vehicle give the parties rights to the assets, and obligations for the liabilities, relating
to the arrangement?
No

Terms of the contractual arrangement: Do the terms of the

Yes contractual arrangement specify that the parties have rights to the assets, and
obligations for the liabilities, relating to the arrangement?
No
Other facts and circumstances: Have the parties designed the arrangement so that:
• its activities primarily aim to provide the parties with an
Yes output (i.e. the parties have rights to substantially all the economic benefits of the assets held in the
separate vehicle) and
• it depends on the parties on a continuous basis for setting the liabilities relating to
the activity conducted through the arrangement
No

Joint Operation Joint Venture

JOINT OPERATIONS
– No separate entity is established to conduct joint
activities
– A joint operator enters into an agreement with one or
more joint operator to produce, market, and distribute a
specific product
– Each joint operator provides its specific operating
expertise
• Each may agree to use their own assets, incur their
own expenses and liabilities, and finance their own
requirements
• Joint operators agreement
– Income sharing
30
– how shareable costs are to be allocated to joint operators
 FS OF PARTIES TO A JOINT ARRANGEMENT

• A joint operator shall recognize in relation to its

interest in joint Operation :
a) Its asset, including its share of any assets held jointly
b) Its liabilities, including its share of any liabilities incurred
jointly.
c) Its revenue from the sale of its share of the output arising
from joint operation
d) Its expense, including its share of any expense incurred
jointly.
NB: The above are accounted for in accordance with the
applicable IFRSs
 JOINTLY CONTROLLED ENTITIES (JOINT VENTURE)

– This may be a corporation, a partnership, or other

form of organization
– separate entity controls assets of the joint venture,
incurs liabilities and expenses, and earns income
– Each venturer usually has an ownership
interest in the venture and is entitled to a share of its
profits or output
– when organized, the individual venturers contribute cash
or other assets in return for an ownership interest
• contributions are recognized by each venturer as an

investment in the JV
32
 07/04/2024

DETERMINATION OF SEPARATE ENTITY AS JOINT OPERATION OR JOINT VENTURE

 Example 1
 A and B enter into a contract to acquire and operate a
shopping centre
 A and B set up X to own the shopping centre
 Legal form of X is such that X has rights to the assets and
liabilities for the obligations (not A and B)
 Activities include: rental of retail units, managing the car
park, maintaining the centre and its equipment (such as
lifts), and building the reputation and customer base
 The parties are not liable for the debts or liabilities of X
(liability limited to unpaid capital contribution)
 A and B have the right to sell or pledge interests in X
 A and B receive share of the net rental income
33
• Example 2: Berta and Satcon construction have jointly formed a
new company (BS Construction) to undertake a government project (
Addis Abeba – Nairobi railway). The new company’s legal form is
that Berta and Satcon construction have rights to the assets, and
obligations for the liabilities of the entity
• Required:
a. Determine weather the new entity is joint operation or joint venture?

34
Example 3: Sunshine real estate and China construction company,
have set up a separate vehicle (SRCCC Company) which
manufactures constriction materials in Oromia special zone
• According to SRCCC ‘s legal form, SRCCC has rights to its own
assets, and obligations for its own liabilities, relating to the
arrangement.
a. Determine weather the new entity is joint operation or joint
venture?
b. Which standards are used by Sunshine and China construction
company to account their investment in SRCCC Company?
 Example 4
 A & B successfully tendered jointly for a contact to give consultancy
services for a large corporation in return for Br3 million.
Contractual arrangement between A & B:
 each uses its own finances, facilities and employees in the
consultancy activity
 A designed the accounting, finance and IT systems and prepares the
related manuals at a cost of Br800,000.
 B designs the operations, HRD, and marketing systems and prepares
the related manuals at a cost of Br1 million.
 A & B share equally in the Br3 million billed & received jointly to
the corporation.
EX5 -A and B jointly establish a corporation (C) over which they have joint
control. The legal form of C, an incorporated entity, initially indicates that the assets
and liabilities held in C are the Assets and liabilities of C. The contractual
arrangement between the parties does not specify that the parties have rights to the
assets or obligations for the liabilities of entity C.

Accordingly, the legal form of C and the terms of the contractual arrangement
indicate that the arrangement is a joint venture.
However, A and B agree to the following:
􀁸 A and B will purchase all the output produced by C in a ratio of 50:50.
􀁸 C cannot sell any of the output to third parties, unless A and B approve it. The
purpose of the arrangement is to provide A and B with the output they require, so
sales to third parties are expected to be uncommon and not material.
􀁸 The price of the output sold to A and B is set by them at a level that is designed
to cover the costs of production and administrative expenses incurred by C. The
arrangement is intended to operate at a break-even level.
EX6-Banks A and B (the parties) agreed to combine their corporate,
investment banking, asset management and services activities by
establishing a separate vehicle (bank C). Both parties expect the
arrangement to benefit them in different ways. Bank A believes that
the arrangement could enable it to achieve its strategic plans to
increase its size, offering an opportunity to exploit its full potential
for organic growth through an enlarged offering of products and
services. Bank B expects the arrangement to reinforce its offering in
financial savings and market products.

The main feature of bank C’s legal form is that it causes the separate
vehicle to be considered in its own right (i.e. the assets and liabilities
held in the separate vehicle are the assets and liabilities of the
separate vehicle and not the assets and liabilities of the parties).
 CONT…D
Banks A and B each have a 40 percent ownership interest in bank C,
with the remaining 20 per cent being listed and widely held. The
shareholders’ agreement between bank A and bank B establishes joint
control of the activities of bank C. In addition, bank A and bank B
entered into an irrevocable agreement under which, even in the event
of a dispute, both banks agree to provide the necessary funds in equal
amount and, if required, jointly and severally, to ensure that bank C
complies with the applicable legislation and banking regulations, and
honours any commitments made to the banking authorities. This
commitment represents the assumption by each party of 50 per cent
of any funds needed to ensure that bank C complies with legislation
and banking regulations.
 ACCOUNTING FOR JOINT OPERATION
 Investors company account line-by-line their share of assets,
liabilities, expenses, and revenues of joint operation according
to the contract.
 It requires that a joint operator recognizes line-by-line the
following in relation to its interest in a joint operation:
 Its assets, including its share in the assets of joint operation
 Its liabilities, including its share in the liabilities of joint

operation
 Its revenue , including its share in the revenue of the joint

operation
 Its expenses, including its share in the expenses of the joint

operation
40
FINANCIAL STATEMENTS OF A JOINT OPERATOR

Its revenue from

the sale of its
Its share of the
Its assets,share of the
revenue from the
includingoutput
its arising
sale of the output
share of any
Its liabilities, from the joint
by the Its expenses,
joint
assetsits
including held jointly
operation including its
operation
share of any share of any
liabilities expenses incurred
incurred jointly jointly
FS of a joint
operator
 ACCOUNTING FOR JOINT VENTURE

 IFRS 11 and IAS 28 require joint ventures to be accounted for

using the equity method( single line reporting)
 Equity method : is a method of accounting whereby the
investor initially recognizes its investment at cost and
subsequent adjusted for :
 the investor’s share in profit or loss of the investee,
 the investor’s share in distribution made by the investee.
 Equity Method should be discontinued from the date on
which the joint venturer ceases to have joint control over or
have significant influence on a joint venture.

42
 EQUITY METHOD

 Initial Investment --Investment in JV….xx

Cash/other assets….xx
 Net Income ---------Investment in JV….xx
Income from JV…….xx
 Net Loss -------------Loss from JV……...xx
Investment in JV…...xx
 Dividend ------------Dividend receivable/ cash…..……...xx
Investment in JV…………….…...xx
Equity accounting for a JV ’s losses continues until the investment is reduced to
zero. Additional losses may be recognized as a liability if an entity has a legal or
constructive obligation or made payments on behalf of the associate or joint
venture Recognition of future share of profits only after share of profits equals
losses.
 EXAMPLE :
• XYZ Company is a company formed between Meta and
Finchia companies on Jan. 1, 2006 by investing Br. 320,000 each
for a 50% interest in the joint arrangement . After operating for a year,
the new entity has summarized the following financial statements.
Their contract indicates that the two parties share
Assets ,liabilities ,revenues and expense based on their level of
ownership interest.
XYZ Company/Income Statement
For the Year Ended December 31, 2006
Revenue 1,600,000
Less: Costs and expense ( 1,200,000)
Net Income 400,000
Net Income Division :
Meta 200,000
Finchia 200,000 44
 XYZ Company/Statement of Joint venturers’(operator) Capital
For the Year Ended December 31, 2006
Meta Finchia Combined

Investment on January 1 Br320000 Br320000 Br640,000

Add: Net Income 200,000 200,000 400,000
Jointventurers’(operator) capital, Dec31, Br520,000 Br520,000 Br1,040,000
XY Company/Balance Sheet
December 31, 2006
Assets
Current Assets $1,280,000
Other Assets 1,920,000
Total Assets $3,200,000
Liabilities & Venturers’ Capital
Current Liabilities $640,000
Long-Term Liabilities 1,520,000
Total Liabilities $2,160,000
Venturers’(oporators) Capital:
Meta $520,000
Finchia 520,000 $1,040,000
Total Liabilities & Venturers’ Capital $3,200,000
 Mata /Income Statement
For the Year Ended December 31, 2006
META COMPANY ’S SEPARATE FINANCIAL STATEMENTS.

Revenue 4,000,000
Investment income 200,000
Less: Costs ( 2,200,000)
Net Income 2,000,000
Mata B/Sheet 12/31/2006
Assets
Current Assets $1,200,000
Investment in XYZ Co. 520,000
Other Assets 2,080,000
Total Assets $3,800,000
Liabilities & owners equity
Current Liabilities $500,000
Long-Term Liabilities 1,800,000
Total Liabilities 2,300,000
Dec31,2006,Capital: $1,500,000
Total Liabilities & owners equity $3,800,000
46
ASSUMTION 1: XYZ IS JOINT OPERATION(PARTNERSHIP)

 To record investment made in XYZ investments

January 1,2006. Investment in XYZ Company 320,000
Cash 320,000
 To record earnings in a joint operation
Dec, 31,2006 Investment in XYZ Company 200,000
Investment income 200,000
 Investors( joint operators) account line-by-line thier share of assets, liabilities, expenses,
and revenues of joint operation based on the contractual arrangement reached among
themselves as follows:

Dec, 31,2006 Current assets 640,000

Other assets 960,000
Investment income 200,000
Costs and expenses 600,000
Current liabilities 320,000
Long-term Debt 760,000
Revenue 800,000
Investment in XYZ Company 520,000 47
 Meta share in XYZ
WORKING PAPER FOR COMBINED
company JO FINANCIAL
EliminationREPORT
Total
Income statement

Sales 4,000,000 800,000 4,800,000

Investment income 200,000 (200,000) 0
(2,800,000
Costs and expense (2,200,000) (600,000) )
Net income 2,000,000 200,000 2,000,000
Balance sheet
Current assets 1,280,000 640,000 1,920,000
Investment in xyz JO 520,000 (520,000) 0
Other assets 2,000,000 960,000 2,960,000
Total assets 3,800,000 1,600,000 4,880,000
Current liability 500,000 320,000 820,000
Long term liablity 1,800,000 760,000 2,560,000
Dec31,06,capital 1,500,000 520,000 (520,000) 1,500,000
Total lia & capital 3,800,000 1,600,000 4,880,000

48
ASSUMTION 2: XYZ IS JOINT VENTURE(PLC)

 To record investment made in XYZ investments

January 1,2006. Investment in XYZ Company 320,000
Cash 320,000

 To record earnings in a joint operation

Dec, 31,2006 Investment in XYZ Company 200,000
Investment income 200,000

 The venturer company’s interest in the joint venture is presented in

its own report using single account called Investment in
joint venture, not on a line by lines base as follows:
49
 Meta Company , Statements
Income statement
Sales 4,000,000
Investment income 200,000
Costs and expenses (2,200,000)
Net income 2,000,000
Balance sheet
Current assets 1,280,000
Investment in XYZ JV 520,000
Other assets 2,000,000
Total assets 3,800,000
Current liability 500,000
Long term liability 1,800,000
Dec31,06,capital 1,500,000
Total lia & capital 3,800,000 50
COMPARISON(
JO
METEHARA COMPANY
JV
)
Sales 4,800,000 Sales 4,000,000
Investment income 0 Investment income 200,000
Costs and expense (2,800,000) Costs and expense (2,200,000)
Net income 2,000,000 Net income 2,000,000

Balance sheet Balance sheet

Current assets 1,920,000 Current assets 1,280,000
Investment in xyz JO 0 Investment in xyz JV 520,000
2,000,000
Other assets 2,960,000 Other assets
Total assets 4,880,000 Total assets 3,800,000
Current liability 820,000 Current liability 500,000
Long term liability 2,560,000 Long term liablity 1,800,000
Dec31,06,capital 1,500,000 Dec31,06,capital 1,500,000
Total lia & capital 4,880,000 Total lia & capital 3,800,000
51
PARTIES IN A JOINT ARRANGEMENT BUT DOESN’T HAVE
JOINT CONTROL

 A party that participates in, but does not have joint control over
a joint venture is required to account for its interest in the
arrangement in accordance:
 With IFRS 9 financial instruments if it has no significant
influence, or
 In accordance with IAS 28( equity method) if it has
significant influence over the joint venture.
 However, if that party has rights to assets and obligations for
liabilities, the accounting is the same as that for a joint operator.
 IF not have the above features follow other relevant IFRS
standard

52
CONT……D
Accounting for both the profit deferral and subsequent recognition
takes place through adjustments to the “Equity in Investee Income”
and “Investment” accounts.
Example1- Assume that Major Company owns a 40 percent share of
Minor Company, joint venture formed by Major and Hunda Co. In
2018, Major sells inventory to Minor at a price of $50,000. This figure
includes a gross profit of 30 percent, or $15,000. By the end of 2018,
Minor has sold $40,000 of these goods to outside parties while
retaining $10,000 in inventory for sale during the subsequent year.

Example2 -Assume that Major Company once again owns 40 percent

of Minor Company. During the current year, Minor sells merchandise
costing $40,000 to Major for $60,000. At the end of the fiscal period,
Major still retains $15,000 of these goods. Minor reports net income
of $120,000 for the year.
 EXERCISE
1. Elixir Company, jointly controlled JV by Regency and Ford, sold
inventory to Regency Corporation in 2018 for €2,000 profit. Thirty
percent of this inventory remains unsold by Regency at the end of
2018. Elixir’s net profit for 2018, including the gross profit on the
inventory sold to Regency, is €20,000; Elixir’s income tax rate is
34%. Regency should make the following journal entries for 2018
(ignoring deferred taxes):
2. Assume that Radnor Co., which owns 25% of Empanada Co., sold to
Empanada an item of property, plant and equipment having a five-year
remaining life, at a gain of €100,000. Radnor Co. expects to remain in
the 34% marginal tax bracket. The sale occurred at the end of 2018
1; Empanada Co. will use straight-line depreciation to amortize the asset
over the years 2018 through 2023.
The entries related to the foregoing are:
CONTINUOUS ASSESSMENT

Reassess if change in:

►Joint control
►Type of joint arrangement
►Legal form
►Contractual terms
►Facts and circumstances
TRANSITION-EQUITY METHOD TO JOINT OPERATION

Derecognize the equity method investment for earliest period

presented (“A”)

►Recognize share of assets and liabilities, including goodwill

that formed part of the carrying amount of the equity method
investment (“B”)

►Any difference between above:

►If B > A, first reduce goodwill, then retained earnings
►If A > B, recognize in retained earnings

►Disclose reconciliation

No remeasurement if interest changes from associate to joint venture

(or vice versa)
 CONT…D
If an entity gains control over a former joint venture, and the acquiree
meets the definition of a business, the entity applies IFRS 3.

Joint venture becomes a financial asset (or vice versa)

If a joint venture becomes a financial asset, the measurement method

changes. An entity measures its retained interest in the financial asset at
fair value, which becomes its fair value on initial recognition as a
financial asset.
The entity recognizes in profit or loss any difference between:
(a) the fair value of any retained interest and any proceeds from
disposing of a part interest in the joint venture; and
(b) the carrying amount of the interest in the joint venture at the date the
equity method was discontinued.
• The accounting treatment of the reverse is not explicitly dealt by
the current IAS 28.
DISCLOSURE
An entity must disclose information that enables users of its
financial statements to evaluate:

• The nature, extent and financial effects of its interests in

joint arrangements and associates, including the nature and
effects of its contractual relationship with the other investors
with joint control of, or significant influence over, joint
arrangements and associates; and

• The nature of, and changes in, the risks associated with its
interests in joint ventures and associates.
CONT…D
An entity is required to disclose information about significant
judgments and assumptions it has made (and changes to those
judgments and assumptions) in determining:
a. that it has control of another entity,
b. that it has joint control of an arrangement or significant influence
over another entity; and
c. the type of joint arrangement (i.e. joint operation or joint venture)
when the arrangement has been structured through a separate vehicle.
CONCLUSION
End of Chapter one (IFRS 11)

Thank you
Questions or Comments

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EXERCISE 1

 Arthur Company and Beatrice Company each

invested Br 400,000.00 for a 50% interest in
ARBE joint venture on January 1, 2019. At
December 31, 2019, ARBE reported a Net
Income of Br 300,000.00 and also on December
21, 2019 it declared a dividend of Br 100,000.00.
EXERCISE 2

 On 1/3/2014 EEP buys 30% of Entity B for Br120 million(Assume

through this interest EEP gained Joint control over B).
 Entity B’s profit = Br80 million for the year ended 31/12/2014
(including Br66.67million from March to Dec). On 20/12/2014
Entity B declared a dividend of Br100 million. The fair value of
EEP`s share in B at December 31,2019 is Br 115,000,000.00.
 Entity B reported loss of Br400 million for year ended 31/12/2015
and declared no dividend. It also reported profit of Br300 million
for year ended 31/12/2016 and declared no dividend .
 HOME WORK

1. Entities A and B own 55 per cent and 10 per cent respectively of the
ordinary shares that carry voting rights at a general meeting of shareholders
of entity Z. Strategic decisions in entity Z require approval by investors
holding more than 60 per cent of the voting power. Is there a Joint control?
Discuss.

2. Entity A researches and develops drugs. Entity B manufactures drugs and

promotes them commercially. Entities A and B enter into a contractual
arrangement whereby they equally participate in the results of research and
development and the commercial promotion of a particular drug that is yet
to be invented. In accordance with the contractual arrangement entity A
undertakes the research and development activities and entity B undertakes
the manufacturing and commercial activities. The entities share all costs and
revenues. Identify this example as JO or JV? Clearly state your reasons.
CONT….
3. On 1 January 20X1 entities A and B each acquired 30 per cent of
the ordinary shares that carry voting rights at a general meeting
of shareholders of entity Z for Br 300,000. Entities A and B
immediately agreed to share control over entity Z. For the year
ended 31 December 20X1 entity Z recognized a profit of Br
400,000. On 30 December 20X1 entity Z declared and paid a
dividend of Br 150,000 for the
year 20X1. At 31 December 20X1 the fair value of each
venturer’s investment in entity Z is Br 425,000. However, there
is no published price quotation for entity Z.
Discussion
 Compare commercial code JV with IFRS joint

arrangement definition and classification.

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